The Parent Tax Credit
Most parents can take advantage of at least one form of parent tax credit when filing to help soften the expense of raising a child.
This article provides an overview of some of the benefits that are available to parents in the form of tax credits.
You have already gone through what may have been the happiest, yet longest day of your life -- the day your little angel (or monster, depending on the hour of the day) came into the world. However, as the euphoria fades away, the reality starts to sink in. When it comes right down to it, being a parent can be quite expensive. Not only do kids require new furniture, food and healthcare, but they will also need more clothes and diapers that you can probably imagine right now.
Not to fear, though, the federal government has your back when it comes to the expenses related to your child care. This article will focus on the parent tax credit, which is really two different kinds of tax credits: the dependent exemption and the child tax credit.
As you probably know, the Internal Revenue Service allows each person that pays income tax to exempt a portion of their income that is not taxable. In 2016, this amount is $4,050 for you, and if you file as a married couple, you get to double this amount (you each get to take one exemption, meaning a total exemption of $8,100).
When your little bundle of joy comes into the world, the federal government allows you and your spouse to claim one more dependent exemption for each child you have. This exemption is allowed for each child that a couple has under the age of 19 (as long as the child is actually dependent upon you, as their parents). In addition, you may be able to claim a dependency exemption for a child over the age of 19 if the child is a full time student and meets a few other requirements.
You may be wondering, and with good cause, exactly how much you will be able to claim as the dependency exemption for your parent tax credit. This will depend upon how much money you and your spouse make in a year. For a married couple in 2016 that filed a joint tax return, they will receive $4,050 per dependent as long as their combined income is not more than $311,300. If the couple collectively makes more than this, the exemption will be reduced. The ceiling for earnings varies depending upon your filing status. If you are single and file alone, the ceiling is $259,400. Any earnings past this will reduce the amount of the dependency exemption.
Claiming a dependency tax exemption is pretty easy. All you have to do is complete line 6c of your 1040 or 1040A. You will need to provide a Social Security number or Adoption Taxpayer Identification Number for your child as well. Then just be sure to complete the rest of your tax return properly and fully.
Child Tax Credit
In addition to the dependent exemption, you may also be able to claim a child tax credit as another parent tax credit. This tax credit is designed to help parents that have low incomes support their families, and is therefore only available to people that make less than a certain amount of money. As it currently stands, the base tax credit is $1,000 for each qualifying child (under the age of 17), but this amount is reduced if your reported income exceeds a certain amount. In 2016, the threshold income level for a joint return was $110,000, and the child tax credit was reduced by $50 for each $1,000 (or fraction thereof) that the reported income exceeded the threshold level.
To make this math easier to understand, it is helpful to look at a few examples.
First, let us assume that Fred and Amy have three children under the age of 17, and their reported income on their joint return was $100,000. This income is below the threshold of $110,000, which means that Fred and Amy will be able to claim a $3,000 tax credit on their income taxes (3 children x $1,000 tax credit per child).
Now, let us assume the same situation as above, except that now Fred and Amy report $130,000 as their income on their joint return. Because their income is greater than the threshold amount, Fred and Amy will not be able to claim the full $3,000 child tax credit. Instead, they will have to reduce the credit by a certain amount. $130,000 (reported income) - $110,000 (threshold income) = $20,000, the amount that Fred and Amy's income exceeds the threshold income amount. Fred and Amy will lose $50 for each $1,000 their income exceeds the threshold level, meaning that Fred and Amy will lose $1,000 of their child tax credit (20 x $50 = $1,000), so they will only be able to claim a $2,000 child tax credit.
You can figure out the amount of child tax credit you can claim by filling out Schedule 8812 of Form 1040.
Have an Attorney Help You with Your Parent Tax Credit Questions
Parents, especially those with small children, are always busy and often too fatigued to study up on our complicated tax code. If you have questions about the parent tax credit or any other tax issues, you may want to speak with a local tax attorney.